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Can Foreign Aid Accelerate Stabilization?

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  • Casella, Alessandra
  • Eichengreen, Barry

Abstract

This paper studies the effect of foreign aid on economic stabilization. Following Alesina and Drazen (1991), we model ,the delay in stabilizing as the result of a distributional struggle: reforms are postponed because they are costly and each distributional faction • hopes to reduce its share of the cost by outlasting its opponents in obstructing the required policies. Since the delay is used to signal each faction's strength, the effect of the transfer depends on the role it plays in the release of information. We show that this role depends on the timing of the transfer: foreign aid decided and transferred sufficiently early in the game leads to earlier stabilization; but aid decided or transferred too late is • destabilizing and encourages further postponement of reforms.

Suggested Citation

  • Casella, Alessandra & Eichengreen, Barry, 1994. "Can Foreign Aid Accelerate Stabilization?," Institute for Policy Reform Archive 294848, Institute for Policy Reform.
    • Handle: RePEc:ags:inpora:294848
    DOI: 10.22004/ag.econ.294848
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    References listed on IDEAS

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    1. Eichengreen, Barry & Uzan, Marc, 1992. "The Marshall Plan: Economic Effects and Implications for Eastern Europe and the Former USSR," CEPR Discussion Papers 638, C.E.P.R. Discussion Papers.
    2. Alesina, Alberto & Drazen, Allan, 1991. "Why Are Stabilizations Delayed?," American Economic Review, American Economic Association, vol. 81(5), pages 1170-1188, December.
    3. Anat R. Admati & Motty Perry, 1987. "Strategic Delay in Bargaining," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 54(3), pages 345-364.
    4. Eichengreen, Barry & Uzan, Marc, 1992. "The Marshall Plan: Economic Effects and Implications for Eastern Europe and the Soviet Union," Department of Economics, Working Paper Series qt6kr8157r, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
    5. Fernandez, Raquel & Glazer, Jacob, 1991. "Striking for a Bargain between Two Completely Informed Agents," American Economic Review, American Economic Association, vol. 81(1), pages 240-252, March.
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    Keywords

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    JEL classification:

    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F35 - International Economics - - International Finance - - - Foreign Aid

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